SA’s black wealth accumulation crisis

South Africa celebrated its 18th anniversary as a democracy on Friday, yet wealth accumulation continues to elude blacks, who make up about 90% of the population.

Gross capital formation statistics, JSE shareholding figures and home ownership levels indicate that black people own low levels of productive assets in the economy – leading to concerns that there is a crisis in black wealth accumulation.

This means they do not have the kind of assets or capital base to create new wealth, and invest and participate sufficiently in the growth of the economy.

The figures also indicate that thus far, black wealth creation has taken place through the limited transfer of assets or shares from white to black individuals and that there has been little new value or investment by blacks in the economy.

Capital formation figures measure the value of new or existing fixed assets and are a good indicator of how much new value is invested in the economy rather than consumed.

Capital formation figures for South Africa, compiled in 2011 by the World Bank, indicate that there has been a rise in the creation of new wealth of up to 20% between 1991 and 2o11. The statistics show that the black contribution to this crescendo of output has been muted.

Gross fixed capital formation stood at 25.51% of gross domestic product in 2010. This, bar a few fluctuations – including a peak in 1976 – is a steep rise from 19.6% in 1960.

So, impressive levels of new value are being created in the South African economy, but black people still lack the ability to contribute to this as they lack the capital base to invest.

Last October, the JSE released a study that showed that blacks owned 17% of the top-100 listed companies, which represent 85% of the bourse’s total market capitalisation.

This research indicates that just over half of JSE’s black wealth is held through third-party mandated investments like pension funds. The rest of the shares accounted for as black ownership on the exchange are owned by blacks directly.

Direct ownership by blacks on the JSE was acquired through black economic empowerment (BEE) deals, which were financed through debt.

But the debt-free portion of black JSE ownership is just 1.6%.

Since wealth is the total value of what is owned minus what is owed, the net worth of black direct ownership of the JSE is significantly less than the figure indicated in the JSE research document.

The JSE’s study implies that about 83% of the country’s listed shares are owned by white South Africans and foreign investors.

According to a research paper for the Gordon Institute of Business Science written by Andile Makhunga, the levels of BEE deal flow have declined drastically.

In an interview with City Press this week, Makhunga said “the era of mega BEE wealth transfers is gone for good”.

He said there were “two main problems with this model. The first is that whereas there is more than R200 billion worth of BEE deals done thus far, valuations of the wealth created by this model have been eroded by the economic crises.”

He said the second problem was that the model simply transferred wealth to a few individuals – while in the rest of the economy, black people’s incomes were declining significantly.

Thabo Masombuka, executive director of transformation services at Siyakha Consulting, said blacks needed to change the way they amassed wealth instead of focusing on buying BEE stakes from white companies.

“We approach BEE from a minimalist point of view. The top 20 rich black South Africans have stakes in white companies and they have rarely created wealth by starting companies from scratch.

“If blacks want to create meaningful wealth, they must start their own companies instead of buying small stakes from white companies,” said Masombuka, a former director of BEE charters and partnerships at the department of trade and industry.

Businessman Sandile Zungu – who is also the secretary-general of the Black Business Council, a mouthpiece for black business – said the state has also let black people down by failing to use its buying power or procurement capacity to put more wealth in their hands.

“We expect the state to disqualify companies that have poor BEE ratings.

“The state should say you cannot tender for certain contracts unless you have an AAA+ rating,” he said.

Fronting was seen as another wealth-creation inhibitor.

“Black people have allowed themselves to be used as fronts willingly by white companies. This has set us back,” Zungu said.

On the home ownership front, whites still rule the roost and blacks still lag behind. White people own 41% of South Africa’s property and blacks 27%, according to a study done by economic research outfit Economists.co.za.

The research also found that the wealth of whites is largely held in listed shares and houses, while almost half of all black people’s assets are houses.

The solutions

Experts’ solutions to the problem of blacks’ inability to amass wealth must be implemented by government, the private sector, and black and white investors.

These would include:

» More effective and transparent use of the procurement lever of the state to strengthen a fragile black enterprise base;

» More targeted support of the fragile manufacturing sector and a ­re-examination of our exchange rate;

» More skills creation to underpin small and medium enterprise and sustainability;

» Creative solutions to the problems of access and the cost of capital;

» Development finance institutions must use different credit finance criteria and approaches from commercial banks; and

» The South African venture capital community must develop a greater appetite for risk.

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